The EUR/USD pair faces renewed selling pressure on Wednesday, slipping below the 1.0950 level as the US Dollar stages a rebound. After climbing to a fresh five-month high near 1.0955 on Tuesday, the Euro failed to hold its ground in the New York session, retreating toward 1.0900. Traders are positioning cautiously ahead of the Federal Reserve’s (Fed) critical monetary policy decision later today, which could reshape expectations for global interest rates in 2025.

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US Dollar Finds Its Footing After Hitting Multi-Month Lows

The US Dollar Index (DXY), a gauge of the greenback’s performance against a basket of six major currencies, bounced back to trade around 103.70 on Wednesday, recovering from Tuesday’s five-month low near 103.20. The modest recovery comes as market participants brace for the Fed’s policy announcement at 18:00 GMT.

The Fed is widely expected to hold interest rates steady for a second consecutive meeting, maintaining the target range at 5.25%-5.50%, according to the latest data from the CME FedWatch Tool, which shows a 99% probability of no change in today’s decision. However, investors will focus closely on the dot plot projections and Fed Chair Jerome Powell’s remarks during the post-meeting press conference.

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Fed’s "Wait and See" Approach Keeps Markets on Edge

The Fed has consistently emphasized a data-dependent strategy, opting to "wait and see" before making any decisions about potential rate cuts later in 2025. Several policymakers have recently voiced concerns about lingering inflationary risks, particularly as the US economy demonstrates surprising resilience under President Donald Trump’s administration.

Trump’s renewed tariff policies are at the center of inflation discussions. Markets fear that escalating trade barriers could push import costs higher, contributing to a resurgence in consumer prices. US Treasury Secretary Scott Bessent confirmed that countries will receive their individualized tariff rates by April 2, fueling speculation about further global economic disruptions.

According to analysts at Goldman Sachs, "Trump’s tariff proposals could add up to 0.5% to the US inflation rate by year-end, complicating the Fed’s task of managing a soft landing."

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Source: fxstreet

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Source: fxstreet

Euro Weakens Despite German Parliament Approving Debt Restructuring Deal

The Euro remains on the defensive even after Germany’s lower house of Parliament, the Bundestag, passed a significant debt restructuring plan on Tuesday. Chancellor-designate Friedrich Merz’s fiscal package includes an increase in the borrowing limit to fund defense spending and stimulate economic growth. This marks a sharp departure from Germany’s long-standing fiscal conservatism.

While pro-growth on paper, the loosening of fiscal constraints is raising concerns about potential inflationary pressures in the Eurozone. If inflation surges beyond the European Central Bank’s (ECB) comfort zone, it could force policymakers to slow down their rate-cutting cycle. The ECB has already delivered six consecutive rate cuts since June 2024, bringing its benchmark deposit rate to 2.50%, down from 4.00% at the start of last year.

Economists at ING Bank note, “Germany’s fiscal pivot could bolster Eurozone growth in the second half of 2025, but it also increases the odds of sticky inflation forcing the ECB into a more cautious stance.”

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Geopolitical Developments Add Complexity to Market Sentiment

Geopolitical risks are adding another layer of complexity to the EUR/USD outlook. On Tuesday, US President Donald Trump announced a 30-day ceasefire agreement with Russian President Vladimir Putin, targeting an immediate halt to energy and infrastructure attacks in the ongoing Russia-Ukraine conflict. Trump’s announcement, shared on Truth Social, signals potential relief for European energy markets but also introduces uncertainty regarding the conflict’s longer-term resolution.

“We agreed to an immediate Ceasefire on all Energy and Infrastructure, with an understanding that we will be working quickly to have a Complete Ceasefire and, ultimately, an END to this very horrible War between Russia and Ukraine,” Trump stated.

While the ceasefire could ease energy supply concerns in Europe, it remains unclear whether the temporary agreement will translate into lasting peace.

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Technical Analysis: EUR/USD Pulls Back But Maintains Bullish Bias

From a technical standpoint, the EUR/USD pair has struggled to sustain momentum above the 1.0950 region. Wednesday’s corrective pullback has pushed the pair closer to the 1.0900 psychological support zone.

However, the long-term trend remains constructive as the pair continues to trade well above its 200-day Exponential Moving Average (EMA), currently positioned around 1.0660. The decisive breakout above the December 6 swing high of 1.0630 earlier this month confirmed a bullish shift in market sentiment.

The 14-day Relative Strength Index (RSI) remains elevated, hovering near 68.00—just shy of overbought territory—suggesting that bullish momentum is still intact but may need a period of consolidation.